When should you consider exiting a fund?

The equity dedicated mutual fund has generated spectacular returns in the last seventeen months. Many funds and fund categories generated returns in triple digits while net asset values have more than doubled. Nevertheless, many investors had already exited from their investments. We saw that there was profit booking from equity dedicated funds and net outflow from the equity category for six continuous months last year. So, for many investors, there is an opportunity loss.     

Therefore, an exit strategy becomes equally important while investing. An easy way to exit strategy is that you should exit a fund when it stopped performing or you have achieved the goal for which you were investing. There are various reasons why your fund might have stopped performing. Change in fund manager, style drift, and change in the investment process are some of the reasons for which your fund might not be performing and therefore, you should monitor your fund performance.    

Hence, monitoring the performance of the fund becomes an integral part of your investing. There is no thumb rule as to how and when an investor should review his mutual fund holdings, as every investor had invested with a goal and return expectation in mind. Nevertheless, there are some common ways in which funds are reviewed and monitored.  

Firstly, the performance of the fund should be compared to a similar type of funds or funds in the same category. Therefore, a large-cap-oriented fund should be compared with large-cap funds. Similarly, a sectoral fund should be compared with the same sector fund of any other fund house.  

You should also consider monitoring and reviewing fund performance based on your investment horizon, goal, and return expectations. All the above variables keep on changing with time and hence, you should be on the top of your goal and return expectation to exit a fund.   

Coming onto the calculation part of your investment returns, you should use an extended internal rate of return (XIRR), which considers your cash inflows, outflows, and the time they accrue. This is a more powerful tool to analyse your returns rather than its cousin IRR (internal rate of return). This will help you to make appropriate decisions on your returns expectations and actual returns.   

Therefore, you should keep on monitoring your fund performance at least every quarter as this will give you a sense of how the fund has been doing of late and it’s better to take corrective action sooner than later. Besides, do not be in hurry to exit and take decisions only after properly reviewing your investment.